What are arbitrage funds?
Arbitrage funds are equity or mutual funds that take advantage of changing prices of securities to buy and sell shares in random, but calculative moves. They work on the fluctuating prices of equity shares in the spot and futures markets. It uses the differences between the current prevailing prices and the price of the futures of those same securities so that investors can generate high returns. The fund managers of arbitrage funds simultaneously buy shares in the cash market and sell the interest in spot, futures, or derivatives markets. The difference in the buying price and selling price is the profit you make.
Arbitrage funds are a type of mutual fund, but they work differently. Most mutual funds purchase stocks and sell them once the price goes up. However, arbitrage funds profit on price differences in various markets. If you want to profit from volatile markets without taking a high risk, arbitrage funds are suitable for you.
Are arbitrage funds risky?
Compared to mutual funds like sectoral funds, arbitrage funds involve less risk. They are a great way to get good returns with lower risk. Arbitrage funds are good for volatile markets as they earn profit and generate good returns even when prices fluctuate. They don’t have any counterparty risk because trades happen on the stock exchange. Unlike other diversified equity mutual funds, there is no exposure to equities with arbitrage funds even if the fund manager buys and sells shares in the cash and futures market.
Investment in arbitrage funds may be smooth, but there can be some risks. If more people start trading in arbitrage funds, arbitrage opportunities may be less available for you. Also, the spread between cash and futures market prices can erode, which may leave little for you if you’re an arbitrage-focused investor. You may have to invest in other types of debt funds to gain better returns.
Who should invest in arbitrage funds?
Arbitrage funds rely on making profits from low-risk buy-and-sell opportunities in the cash and futures market. Their risk level can be compared to a pure debt fund. Arbitrage funds typically follow Crisil BSE 0.23% Liquid Fund Index as their benchmark. Considering all this, investing in arbitrage funds is suitable for you if you are seeking equity exposure but don’t have a high-risk appetite.
So, arbitrage funds are an ideal and safe option if you want to avoid the risk related to equity funds and safely park surplus funds when the markets fluctuate. Arbitrage funds are also suitable for you if you have a short to medium-term horizon of 3-5 years. However, arbitrage funds charge exit loads. So, you may want to invest in them only when you are ready to remain invested for at least 3-6 months.
Which are the best arbitrage funds?
These are some of the best arbitrage funds to invest in:
- Quant Active Fund Growth, with 5-year returns of 25.16%
- Mahindra Manulife Multi-Cap Badhat Yojana, with 3-year returns of 29.5%
- ICICI Prudential Smallcap Fund, with 5-year returns of 17.06%
- Baroda Multi-Cap Fund Plan A Growth, with 5-year returns of 16.67%
- SBI Contra Fund – Direct Plan-Growth, with 5-year returns of 16.25%
The Bottom line
If you’re a risk-averse investor, arbitrage funds may be a great investment option for you. However, it’s best to weigh all your options and invest in other pure debt funds to be on the safer side. To know more, check out different investment options from ANSPL.
